NEW YORK (MainStreet) — Mela Frankfort wishes the current tax code would expand to allow parents who are supporting their grown children while they are living at home and looking for a job. That, of course, is a phenomenon all too familiar for parents of Millennials.
Frankfort, who lives in Ventura, Calif., is helping out her 20-year-old son who is an unemployed guitarist. There are no deductions she can take advantage of since he is one year older than the cutoff age required by the IRS for dependent children if you are not a student.
“If Americans are helping our struggling adult kids, we should at least be able to write off the space,” she said. “It would just make sense.”
Though there's no exact recourse for Frankfort's dilemma, parents are able to take advantage of a variety of other federal tax deductions, including money they spend on childcare or education. In most cases parents, can claim children as a dependent and for each dependent a parent is entitled to claim, they can deduct $3,950, said Brain Ashcraft, an executive with Liberty Tax Service in Virginia Beach, Va.
Here are the top six most common tax deductions available to parents.
1. Claim the Child Tax Credit. With the Child Tax Credit, you can reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17. The credit begins to phase out when your modified adjusted gross income is above $110,000 for married taxpayers filing jointly and $75,000 for single filers.
2. Claim the Credit for Child and Dependent Care. If you paid someone to care for your child so you could work, you may be able to reduce your federal income tax by claiming the Credit for Child and Dependent Care expenses on your tax return. This credit is available to people who paid for child care services for dependents under age 13 in order to work or look for work, said Rebecca Pavese, a CPA and financial planner with Palisades Hudson Financial Group in Atlanta. Qualified child care includes daycare, camps, and before and after school programs. For taxpayers with adjusted gross income of more than $43,000, the credit is $600 for one child and $1,200 for two or more children.
3. Make sure you have health insurance coverage for yourself and your dependents. The individual shared responsibility provision of the Affordable Care Act requires that you and each member of your family have qualifying health insurance or make a payment when you file your tax return.
4. Start a 529 plan. A 529 plan is a college savings plan, and the earnings on the plan are not subject to federal tax and generally not subject to state tax when it used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books and room and board, said Clare Levison, a CPA in Blacksburg, Va.
5. Consider adjusting your withholdings. You are allowed one exemption for each person you can claim as a dependent. If you’re a new parent, leaving your withholdings the same will probably result in a larger refund at the end of the year, while adjusting your withholdings will result in a larger paycheck each pay period, said Levison.
“Take advantage of the tax benefits you may qualify for as a parent,” said Kathy Pickering, executive director of The Tax Institute, an independent research and analysis group at H&R Block in Kansas City, Mo. “If new parents decide not to file jointly, they need to choose who will claim their child as a deduction. Remember that only one person can claim benefits for a child even if you cohabitate.”
6. Open a flexible spending account to help pay for any health-related expenses. If your employer offers flexible spending accounts, you should consider both the health care account and the dependent care account, said Pavese, the financial planner in Atlanta. A flexible spending account allows you to pay for these types of expenses with pre-tax dollars. “Remember that you need to spend the money you put in these accounts on qualified expenses before the deadline, which is usually the end of the year or you will lose the money,” she said.
Here are some other tax tips for parents.
2. There are two credits available to help with the cost of higher education. The American Opportunity Tax Credit and the Lifetime Learning Credit can help to reduce the amount of tax owed. Those who don’t owe any taxes can still qualify, said Ashcraft of Liberty Tax Service.
3. For those who are self-employed and paid for health insurance, premiums that were paid during the year may be qualified to be deducted. This includes the costs to cover children under age 27, even if they are not dependents.
4. The Earned Income Tax Credit applies to all taxpayers, whether they are parents or not. If you worked in 2014, but earned less than $52,427, you may qualify for this tax credit, which rewards the individual with up to $6,143, said Ashcraft.
--Written by Ellen Chang for MainStreet